Document Type


Publication Date

Fall 2020

Publication Citation

15 Tennessee Journal of Law and Policy 1 (2020)


Insider trading cases, which are typically prosecuted as securities fraud, carry a mystique rarely present in securities litigation. As a former U.S. Attorney for the Southern District of New York once observed, the cases involve "'basically cops and robbers. . . .[d]id you get the information and did you trade on it?" It is no wonder that each insider trading case featured in this symposium presents a captivating story. But for two distinct reasons, Chiarella v. United States occupies a special place in history. It was the first prosecution under the federal securities laws for the crime of insider trading. And the U.S. Supreme Court's iconic holding--regarding the circumstances under which insider trading constitutes securities fraud--not only profoundly changed the law in 1980 but also continues to define insider trading's contours right up to the present day.

Chiarella's facts are straightforward and memorable. The defendant was employed by a financial printing firm hired to publish announcements of takeover bids. On several occasions he managed to deduce from code names the identities of the actual companies, and then used that confidential information to surreptitiously purchase stock in the acquisition targets. After settling a civil securities fraud action brought by the Securities and Exchange Commission, Chiarella was indicted in New York federal court for criminal securities fraud, found guilty by a jury, and unsuccessfully appealed to the Second Circuit. The Supreme Court, however, overturned his conviction.

While the case is famous, important aspects of Chiarella have gone unnoticed or been long since forgotten. This essay sets out to explore these aspects in order to better understand how a seemingly mundane SEC settlement involving just over $ 30,000 in ill-gotten gains morphed into a groundbreaking insider trading prosecution and Supreme Court decision. The exploration draws from a close analysis of the civil and criminal litigation record as well as interviews with most of the principal attorneys involved in the case at its various stages, all of whom went on to extraordinary careers in public service, private practice, or law teaching (with many toggling between two or all three). This distinguished cadre includes: Stanley S. Arkin, Judge Frank H. Easterbrook, Ralph C. Ferrara, Robert B. Fiske, Jr., Paul Gonson, Professor Donald C. Langevoort, Judge Jed S. Rakoff, Lee S. Richards III, John S. Siffert, and John "Rusty" Wing, and extends as well to their remembrances of Stephen Shapiro.

Insider trading law in the U.S. is routinely depicted as "judge-made" or "judicially created." The description is apposite. Although Congress statutorily authorized the SEC rule prohibiting "fraud in connection with the purchase or sale of any security," it is courts that must determine, as a matter of federal common law, whether securities trading on the basis of material nonpublic information constitutes a "deceptive device or contrivance" under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), and thus a "fraud" within Rule 10b-5's prohibition. But the description also leaves unacknowledged the essential role of the SEC, DOJ, and defense attorneys in framing the arguments on which the judicial rulings are based.

Nowhere have attorneys influenced the development of insider trading law more profoundly than in the various phases of the Chiarella litigation. This story therefore suggests, with no hint of exaggeration, that Chiarella's indelible impact results as much from the case's lawyering as from the ruling announced by the Court in its landmark decision.